Student housing looks like a good bet while the undervalued pound recovers
Funds than invest in purpose built student accommodation require a three-to-five year lock up but provide attractive annual returns of 15 to 20pc
The UK has long been hailed as one of the most stable and successful markets for residential property investment, making it popular among Hong Kong investors.
However, many are now considering how to exit without losing their capital gains on the weak pound, even withstanding the recent move by the Bank of England to raise interest rates by 0.25 per cent which has brought about a slight strengthening of sterling.
Most have adopted a hold strategy on the basis that sterling may strengthen, as well as a lack of clarity regarding alternative options within the UK.
There are various factors driving this desire to move out of the UK residential property market.
Average gross yields are 4 per cent countrywide, which appears to be a good return in an era of low interest rates, however these are on the decline, down from 4.9 per cent a year ago. It is worse still when you consider the potential net yield is only 2.5 per cent.
Compounding the falling yields, the UK has been struggling with policies designed to cool property investment.
Stamp duty changes have made it more expensive for buy-to-let investors.
Tax benefits, most notably the ability to write off mortgage interest against income, have been removed.
Capital gains tax was also introduced for non-UK resident buyers in 2015. And let’s not forget the 40 per cent inheritance tax which applies to UK based assets, even for foreigners.
Furthermore, investors must deal with the ongoing hassle of filing UK tax returns and managing a time consuming, hands-on asset.
UK real estate values are at record highs and it is widely believed that further growth is cooling, signalling an ideal time to capitalise on the growth.
In August 2017, according to the UK House Price Index, the average UK property is now 225,956 pounds (US$296,371), an annual increase of 5 per cent and an increase of 0.5 per cent on the month before.
Meanwhile in London, prices have risen 2.6 per cent since last year with the average property value now at 484,362 pounds, a fall of 1 per cent since the month before.
However, the currency crash that was triggered by the results of the Brexit referendum last year continues to haunt investors who are keen to sell their assets.
Whether it is to capitalise on growth or to reinvest elsewhere, the 20 per cent decline in sterling undoes all of the positive trends of the last few years.
Whilst price rises now appear to be stabilising, the value of sterling remains low with only a medium-longer term prospect of this reversing. So, what is the solution for investors wishing to exit their UK residential properties for these reasons, whilst parking their sterling exposure in better after-tax returns?
The UK is still a good market to invest in for many of the reasons that have historically driven demand; governance, a solid legal structure, education, population and economic growth.
It therefore makes sense to keep your investment in sterling if you can, otherwise you immediately realise the loss.
However, instead of holding residential assets, it may be worth switching into alternative options within the UK that will increase your chance of delivering better after-tax returns than residential.
One of the most popular non-residential real estate options is purpose built student accommodation, commonly referred to as PBSA.
Gone are the days of sharing a rundown Victorian terrace house somewhere near campus. Nowadays, university students want city convenience, modern amenities, comfort and quality accommodation.
Accessing opportunities in this sector often requires a minimum investment of 250,000 pounds into a private equity real estate fund.
Investors should look for a company whose strategy sets out to buy land with planning consent, develop the building, manage the operations and stabilise the income before seeking an exit to an institutional investor.
A fund such as this would require you to lock in your investment for around 3 to 5 years but historically well-managed funds have delivered between 15 to 20 per cent annual returns net of taxes and fees.
PBSA and other alternative non-residential investments do not require investors to personally file UK tax returns, undertake any hands on management, source tenants or manage any of the additional burdens that residential property carries.
It is becoming a popular vehicle for professional investors who still want the benefits of a tax-efficient UK real estate investment without the hassle of residential property, and with the potential for growth that helps to hedge against currency loss in the medium to longer term.
Peter Young, chief executive of Q Investment Partners